At present, securities broker dealers in securities markets can cover their short positions by borrowing securities: from security lenders who often warehouse securities on behalf of the lenders' customers, directly from customers to obtain the securities, or from other broker dealers. However, it is not advantageous for broker dealers to borrow securities directly from other broker dealers because that will expose their identity and their current positions in certain securities. With such knowledge, competitors can corner the securities market on the exposed broker dealers and charge exorbitant rates for securities lending.
Another technique for broker dealers to cover their short positions is to go through an inter-dealer broker who is a registered broker with the SEC and provides a centralized means for traders, such as Salomon Smith Barney, to put up offers and bids for different types of collateral, such as securities. Those offers and bids are then shown to the entire trading market while keeping those traders making the offers and bids anonymous. This technique minimizes the exposure of broker dealers in borrowing and lending securities to others, including potential competitors.
Nevertheless, broker-dealer and client-related functions in the securities trading industry for all of the aforementioned techniques conventionally require a significant amount of dedicated resources in the front, mid and back office support areas of many financing desks. Additionally, because most of trading activities are commonly executed through inter-dealer brokers and securities lenders, additional costs to trading entities are needed for fees and margin costs on trading transactions.